Abstract
This paper shows how standard arguments supporting the imposition of price caps break down in the presence of demand uncertainty. In particular, though in the deterministic case the introduction or lowering of a price cap (above marginal cost) results in increased production, increased total welfare, decreased prices, and increased consumer welfare, we show that all of the above comparative statics predictions fail for generic uncertain demand functions. For example, for price caps sufficiently close to marginal cost, a decrease in the price cap always leads to a decrease in production and total welfare under certain mild conditions. Under stronger regularity assumptions, all of the monotone comparative statics predictions from the deterministic case also do not hold for a generic uncertain demand if we restrict attention to price caps in an arbitrary fixed interval (as long as the price caps are binding for some values in that interval).
| Original language | English (US) |
|---|---|
| Pages (from-to) | 93-111 |
| Number of pages | 19 |
| Journal | Review of Economic Studies |
| Volume | 74 |
| Issue number | 1 |
| DOIs | |
| State | Published - Jan 2007 |
Funding
The analogue of Theorems 4 and 5 are proven along the same lines as those theorems. The major difference is that the marginal revenue D1πθ(q∗( p),(n− 1)· q∗( p), p) appearing repeatedly in the proof has to be substituted with max(D1πθ(q∗(p),(n−1)·q∗(p),p),−c−η). ‖ Acknowledgements. We are grateful to two anonymous referees and the Managing Editor Juuso Välimäki for detailed reviews of earlier versions of our paper. We thank Timothy Brennan, Francesca Molinari, John Panzar, Maxim Sinitsyn, Bob Spann, and Asher Wolinsky for helpful comments on the subject. Also, we would like to thank Michael Crew and participants at CRRI’s Advanced Workshop in Regulation and Competition (15th Annual Western Conference) for their comments on an earlier version of this paper. All remaining errors are ours. The views expressed in this paper are those of the authors and not necessarily those of CRA International. The second author gratefully acknowledges research support from The Searle Fund.
ASJC Scopus subject areas
- Economics and Econometrics